UK: An Introduction to Litigation Funding: Brokers

Litigation Funding Broking 

Litigation Funding Broking is a marketplace that straddles three key industries;

• litigation-related insurance

• litigation finance; and

• legal services

Brokers act for the buy-side parties, generally entities with ongoing or contemplated legal actions, but also judgment-holders looking to monetise awards. Such a broker may be engaged by a litigant, a funder or a law firm involved.

The type of buyer and what they are seeking will influence the selection of broker. The emphasis is on connections to both capital sources and efficient insurance solutions that can underpin creative funding structures for litigation and arbitration actions. With many businesses suffering hardship in the current economic conditions, litigation funding is an important tool for entities whose very ability to pursue a dispute may be dependent on access to external support from funders and insurers. This is particularly true of SMEs and insolvent entities. Nonetheless, with the cost of capital increasing, and ongoing economic uncertainty, constrained legal budgets within major corporates are stimulating a rise in larger corporates exploring insurance and funding.

Cashflow issues affect law firms too, especially given the growing pressure on lawyers to defer costs and carry heavy amounts of work in progress. Brokers help law firms establish a way to offer partial or fully contingent fee models by using outside capital and insurance policies such as DBA insurance.

Even funders themselves are not immune to cashflow struggles. For example, court delays arising out of numerous factors including Covid-19 mean that investment durations have been extended beyond initial projections. Brokers are being asked to help funders with re-finance as well as lay off risk with insurers (using, for example, Capital Protection Insurance or Judgment Preservation Insurance policies) to help appease impatient investors.

What does “Litigation Funding” broking extend to?

Litigation funding brokers help buyers efficiently source litigation finance and insurance offers from the market to meet their objectives. A common objective is to obtain cashflow assistance from a litigation finance company to meet or assist with the outlays (legal fees and expenses) that need to be paid before any recovery can realised in the case, whether that means recoveries made through winning the case or enforcing a judgment debt.

The term ‘litigation funding broker’ is not restricted to just the intermediation of litigation funding - that is just one part of the litigation funding transaction spectrum. Some litigation funding brokers are regulated by the FCA (and/or other equivalent regulators abroad) to intermediate litigation-related insurance products. Such brokers are in fact predominantly insurance brokers enabling claimants, funders and law firms to use the most efficient form of risk capital available – insurance capacity.

It is noteworthy that the list of Litigation Funding Brokers ranked in Chambers since the guide started in 2020 predominantly comprises insurance brokers. This is because risk protection and cashflow demands of buyers are often indivisible and co-dependent. The most common example is the pre-contractual obligation on the funded party to obtain adverse costs insurance (After-the Event Insurance) before a litigation funding agreement is effective and cash can be drawn down.

Insurance may not involve the provision of cashflow but in practical terms it is very much a form of litigation funding. There are a raft of specialist insurance products that both replace, support or enhance litigation finance offerings.

Here is a list of some of the insurance products that may be relevant to both externally funded and self-funded claimants:

• After the Event (ATE) insurance – adverse costs insurance

• Contingent Fee or Damages Based Agreement insurance

• Arbitration Award Default Insurance

• Judgment Preservation Insurance (appeal risk cover)

• Litigation Buy Out Insurance Each product is a specialist product underwritten by different expert underwriters.

The value of brokers  

There is a significant supply of capital in the litigation finance market: some estimate the total worldwide allocation of capital at USD10bn. Nevertheless, obtaining funding can still be tricky because of the robust due diligence process, analysing the substantive case itself and the economic viability for investment, before litigation funders and insurers will accept a case.

Brokers are adept at matching the demands of buyers to capital providers based on their experience and daily contact with the three industries listed above. Every litigation funder has their own perspective on what makes a case a good investment, influenced by their experience, their available capital, as well as their investment committee appetite and processes. Brokers reduce the risk that buyers and their representatives waste valuable fee earning time scouring the market for suitable funders or insurers for the buyer’s case by focusing on the most relevant sources of finance and/or insurance.

Broker Market Trends  

The number of brokers has steadily increased over time but there has been a rapid expansion in the last 5 years. The result of this influx is likely to be more specialism by areas of law as well as greater awareness of the highly tailored products available to buyers.

For example, some funders are exclusively interested in very large cases needing £5m+ of investment which in turn requires a realistic claim value (and enforcement potential) of circa £50m+. Others are interested in investment commitments between £100k to £1m. Similarly, some divert their resources to insolvency-related litigation, while others concentrate on arbitrations or collective actions. Brokers will seek to represent buyers who have the right cases and legal teams to match the investment criteria of specific funders.

Regulation  

Where the buyer is seeking an insurance product then, to the extent a solicitor assists them in the process, the solicitor must be mindful of regulated nature of the transaction.

Solicitors in England & Wales who are not directly regulated by the FCA must appear on the Exempted Professional Firms (EPF) register administered by the Solicitors Regulatory Authority. The SRA has delegated powers to authorise solicitors to provide assistance to clients in arranging insurance, provided that assistance is ancillary to their legal services role.

Even so, rather than seeking insurance directly, most solicitors will advise their clients to engage a specialist insurance broker who can assess their demands and needs and recommend a suitable insurance product. A regulated insurance broker will give comfort to a solicitor that they can more readily comply with their own SRA obligations, as well as adding value to process by making it quicker and easier.

Litigation funding, in the purest sense of the term, meaning non-recourse cash investments to fund legal costs in return for a share of the proceeds, is not currently regulated in England & Wales, save for voluntary self-regulation via the Association of Litigation Funders for England & Wales (or ‘ALF’). Thus there is no requirement for a licence to broker Third Party Litigation Funding. This could of course change in the future as there is general trend towards greater oversight for the litigation funding industry in general which will inevitably trickle down to broking services.